June 3, 2005
ANOTHER BRICK IN THE WALL OF WORRY
The bond market may be wrong, as so many have charged this week regarding the 10-year Treasury Note's dip to its lowest in more than a year. But this morning's jobs report for May isn't making it any easier for skeptics of the recent rally in debt to deliver a knock-out punch to the forces of fixed-income optimism.
Nonfarm employment, a widely watched measure of national labor trends, rose a meager 78,000 last Month, the Department of Labor reported. If President Bush was still facing a re-election, cries would be heard near and far from his political opponents that the economy wasn't producing sufficient jobs and that a Democrat was needed in the White House. But the election is long gone and so dissecting the latest monthly employment report is again left for dismal scientists and investors to pore over the numbers.
On that score there's not much to chew on. May's 78,000 rise in nonfarm workers is both a sharp drop from April's 274,000 addition and the lowest gain since August 2003. End of story. Yes, any one month can be volatile, and so we shouldn't take any single number too seriously. But waiting for context will take another month for the next jobs report and the bulls and bears are chomping at the bit today.
As you might expect, the bond market took immediate comfort from the sluggish jobs report for May. After the news was released at 8:30 a.m., New York time, traders aggressively bought the 10-year Treasury Note, sending its yield down to just above the 3.8% mark for a time.
Regardless of the debate over where the "right" yield for the 10 year lies, it's clear that the chatter over the weekend will accelerate on the issue of whether the Fed's interest-rate hikes are history. Finger-pointing or celebrating, depending on whether you favor bonds or stocks, for the moment lies with today's labor report. In fact, the employment trend in recent months has been less than stellar, opines Barry Ritholtz, market strategist at Maxim Group. "I have to disagree with the assessment of job growth as 'steady,'" he writes today on his blog, The Big Picture. "Its not -- its been erratic, weak and disappointing. [Non-farm payrolls] rose by a mere 78,000 in May (April's outlier 274,000 was unrevised ). March was revised down by 44,000 to 122,000. Weakness in May was across the board, but notable was the poor service sector growth (+64,000 versus an imaginary +232,000 in April)." Simply put, "Despite the spinning you heard on TV, there's no way to avoid reality: This Nonfarm payrolls report stunk the joint up."
If so, why hasn't the economic stench worked its way over to the stock market? The S&P 500 climbed 6% through yesterday since bottoming out on April 20. The Nasdaq Composite is up nearly 10% over that stretch. What's more, the price of oil in recent weeks is up to its old tricks and has returned in the mid-$50 range. Is this how a recession begins? Or is something rotten in bond land?
Indeed, the Treasury yield curve is nearly flat, with short rates close to matching long rates. Indeed, a spread of less than 40 basis points separates the yield on 10-year Treasury (~3.85%) from its two-year counterpart (~3.5%). That's the smallest spread since early 2001.
As a result, it's not too early to wonder if the yield curve will soon invert, with short yields exceeding long yields. Historically, that's been a sign that a recession is just around the corner. The bond market expects no less. The stock market, for the moment, begs to differ. Who'll blink first?
Posted by jp at June 3, 2005 7:19 PM
If so, why hasn't the economic stench worked its way over to the stock market?
Funny you should ask that:
Red what happens via variant perception
Posted by: Barry Ritholtz at June 4, 2005 4:20 PM
What many people still seem to be missing is the overall unemployment of 5.1%. This is good, both historically and relatively i.e. Germany and France are both mired in such joblessness is amazing they're not rioting in the streets. And Japan has a lower # but they also have a more rigid, less dynamic economy; one that "protects" more jobs at the cost of economic growth.
Point being that much of the punditry is reacting to this "weak" report with confusion as the dollar wasn't hurt (among other observations of course) by such "bad" numbers. But the overall picture is still better than everywhere else.
Posted by: Ray at June 4, 2005 10:20 AM